Why workers aren't getting their fair share

The share of national income that goes to the workforce is falling, while corporate profits rise. That should be good for investors - but Merryn Somerset Web isn't so sure.

I've written here before about the fall in the share of national income that goes to workers in the US and the UK, but a recent report from Capital Economics makes the point again.

In the 1980s around 70% of national income went to workers in the form of wages. By the 2000s that had fallen to 64%. Today in the US, according to Capital Economics, it is around 62%. That decline has been "almost exactly offset by a rise in the corporate profit share". Profits averaged about 8.6% of national income in the 1980s, 10.8% in the 2000s, and in the last few years have even risen as far as 14.3%. So what's it all about?

Andrew Smithers blames it largely on executive compensation which, alongside the collapse of labour's bargaining power, he says has skewed the priorities of management away from long-term corporate health and towards the short term profits that come with firing people or slashing their wages.

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Capital points as well to globalisation. Obviously, cheap labour in the East has hit pay in the West. In 1997, total employment by US multinationals in developing Asia was equivalent to around 4% of US domestic manufacturing employment. Now it is 22%.

But there is a third reason for the shift: the rise of information technology, which has "helped to leverage the output from any combination of capital and labour inputs". However, the productivity gains from this have gone not to labour, but to capital.

That's a trend Capital sees continuing: "automation, ie the substitution of labour for newly developed IT capital, could prove to be the biggest driver of labour's income share in the next decade, threatening relatively well paid jobs in transport, information and finance". Other jobs may well replace those jobs in education, healthcare and leisure but on current trends, they won't be so well paid.

Capital points out rather brutally that this is all good for equities, in that the less labour gets, the more capital gets (in the form of rising corporate profits). But I'm not sure I would bet on it.

Smithers notes that if US profit margins are to return to their long-term mean (which almost everything does in the end) they have to halve. And as I note here, much of this kind of thing depends on what politicians end up doing.

Until relatively recently the massive redistribution of the proceeds of output were disguised by the credit bubble. They aren't any more. That means that unless the 'reshoring' trend somehow accelerates such that labour prices can rise in the US (this isn't impossible) we can expect the government to step in to help change the direction of redistribution.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.